Another power supplement!

There is no doubt that the power sector is ailing. Although state DISCOMs have managed to leverage UDAY by paring financial losses from Rs 515 billion in FY16 to Rs 348 billion in FY17, a marginal decrease in AT&C losses seems to be the bone of contention, as what has been envisaged has not been achieved yet, except bailing-out nonperformers. Reduction in AT& C losses too does not seem to be encouraging. As per the data submitted by states, participating states in UDAY scheme have achieved an improvement of just 1per cent and Rs 0.17 a unit in the gap between Average Cost of Supply (ACS) and Average Revenue Realised (ARR) in FY17.

To mitigate this, the government, in its last ditch to ail the power sector is contemplating on forming a National Power Distribution Company (NPDC), which is currently operated by DISCOMs. The proposed NPDC would help in developing an alternative to these state-owned DISCOMsfor power generators and will uplift the whole sector sentiment. The proposed NPDC could sign long-term power purchase agreements (PPAs) for Central Electricity Authority-projected upcoming thermal capacities as well.

Although, power transmission and distribution is a state subject, the proposed NPDC may strengthen technical and implementation capabilities of financially weakened DISCOMs. Although, similar mechanisms are present in other countries such as Peru and Brazil, can co-existence of NPDC with DISCOMs withstand political influence? There is no doubt that NDPC will force state DISCOMs to increase their operational efficiency as the entity will own the network and distribute power.

Meanwhile, there is an advantage of formulating a central government-backed entity. A note shared by India Ratings Research suggests that the new entity will ensure and enable existing power projects, including small-scale, to access the capital market and avail fixed-interest bonds for a long tenure, thereby addressing counterparty-related risks and helping generation companies in gaining better credit ratings at a standalone level.

But there is a twist in the tale! Since the bargaining power of the proposed NPDC with DISCOMs might be better than any private generation company and similar to that of NTPC and PGCIL, supply under PPAs could be diverted by the proposed NPDC in case of non-payment of dues by state DISCOMs. Should this be a function of the proposed NPDC, gencos' cash flow issues could be resolved. However, this may not go well with the state and the chances are likely of reservations about the proposed NPDC and a large amount of capex required as major challenges. But what state governments are failing to understand that given the significant capex required to modernise distribution infrastructure, a central government entity may have an upper hand than state DISCOMs because NPDC can borrow funds at a 200-300 basis point discount compared with state entities.

That said, the thermal power projects are affected by weak counterparties.Currently, about 50,000 MW of projects are stressed either for want of power purchase agreements (PPAs) from the distribution companies (DISCOMs) or for want of coal or gas. The Reserve Bank of India's (RBI) recent circular orders that all stressed loans over Rs 20 billion must be resolved or taken to the National Company Law Tribunal (NCLT) under Bankruptcy and Insolvency Act. So are Rs 2,000 billion about to head towards NCLT and, eventually, a bulk of that getting liquidated?

On the other hand, given the revised target of 227 GW by FYE22, renewable power projects are in dire need of a strong counterparty to significantly ramp up capacity from the current levels. The proposed NPDC is imperative to the success of power sector and to make faster progress on counterparty diversification. There is no substitute for fiscal discipline and this is another band-aid in the interim. While private sector cronyism has brought banks to the brink, political interference has compounded the bank stress manifold. All aspire for power but the common man bears the brunt finally.